Canada CPI unlikely to alter BOC easing path – BBH

Canada’s August CPI is expected to confirm that underlying inflation pressures are stable but fading, leaving the Bank of Canada free to resume easing as labor market weakness deepens and policy divergence weighs on CAD, particularly against AUD and NOK, BBH FX analysts report.

CAD risks underperformance vs. AUD, NOK

"Canada’s August CPI print (1:30pm London, 8:30am New York) is unlikely to derail the Bank of Canada’s (BOC) easing path. The minutes from the BOC July 30 meeting highlighted that some members argued that further monetary policy support would likely be needed, particularly if the labour market softened further and If incoming data showed that the upside risks to underlying inflation were not materializing."

"The BOC has room to resume easing after being on hold since April. Canada’s labor market backdrop is deteriorating rapidly as the economy lost -65.5k jobs in August and -40.8k in July. Underlying inflation remains high but may be topping-out. In August, headline CPI is expected to rise to 2.0% y/y vs. 1.7% in July due to base effect while core CPI (average of trim and median CPI) is seen unchanged at 3.05% y/y vs. 3.05% in July."

"The swaps market is pricing nearly 90% odds of a BOC 25bps cut to 2.50% tomorrow and over 80% probability of another 25bps reduction by year-end to a terminal level of 2.25%. The BOC’s more dovish policy stance relative to the RBA and Norges Bank argues for further CAD underperformance against AUD and NOK."